In Big Law Tax Scramble, Sometimes It Takes a Village
How confusion over the tax bill unfolded for a clutch of Big Law partners in Bellport, Long Island.
January 04, 2018 at 12:11 PM
4 minute read
Village of Bellport, New York.
In the final days of 2017, law firms and their partners peppered Citi Private Bank's Law Firm Group with queries about establishing lines of credit so they could prepay their 2018 property taxes, according to Michael McKenney, head of credit origination for the Citi unit.
The lawyers were in a hurry to get those property taxes prepaid before Jan. 1, when a $10,000 cap became effective on related federal income tax deductions; that cap is part of the new tax bill President Donald Trump signed into law before Christmas.
But in an advisory notice posted Dec. 27, the Internal Revenue Service complicated matters by warning that the property tax prepayments, which lawyers in high property tax regions, such as New York and New Jersey, were busily crafting, might only qualify as deductions in certain situations. “Prepayment of anticipated real property taxes that have not been assessed prior to 2018 would not be deductible in 2017,” the IRS explained.
The urgency to preserve property tax deductions for 2018, and the added wrinkle of the IRS clarification, galvanized some big firm law partners who have homes in the celebrity-studded village of Bellport on Long Island, New York.
The village, which offers its roughly 2,000 residents an exclusive ocean beach, golf course and marina, is a short ferry hop from Fire Island but considerably quieter. Past residents reportedly included Anna Wintour, Isaac Mizrahi, and Jackie Kennedy. Isabella Rosellini and Charlie Rose both reportedly own homes there now, as do retired and current partners from Davis Polk & Wardwell, Kramer Levin Naftalis & Frankel, Schulte Roth & Zabel, Paul, Weiss, Rifkind, Wharton & Garrison, Orrick, Herrington & Sutcliffe and Latham & Watkins.
After the IRS issued the advisory clarification, potentially thwarting deduction-preserving plans to prepay 2018 property taxes, many of those Bellport lawyers contacted Bob Rosenberg, a retired Latham partner, who had been a global co-chairman of that firm's restructuring, insolvency and workout department and now serves as a village trustee, according to Ray Fell, Bellport's mayor.
“He had a lot of people contact him,” Fell said about Rosenberg, who did not return a call for this article.
In response to the calls, Fell and his fellow village leaders “passed a resolution indicating that the village clerk had been ordered to accept partial payments of future Bellport taxes based on the 2017 tax warrants, up to the amount of taxes assessed in 2017,” Fell said.
As they accepted the payments, village staffers warned prepayers of their lack of certainty about the IRS's views on this point.
“We told them that they should check with their tax accountants. We gave them a receipt and we put it right on the receipt, 'Please check with your accountant,'” Fell said.
About 65 village property owners were happy to prepay anyway, Fell said. “They just wanted the village to accept the taxes. Everyone I talked to said, 'We understand; it's our risk. We will make our decision about deducting when we file our federal taxes,'” Fell recalled.
According to Citi's McKenney, some law firms had encouraged their lawyers to prepay. ”Some firms have mentioned to us they have circulated internal notes encouraging their partners to seek the advice of their tax professionals and take advantage of this opportunity as appropriate,” he wrote in an email in late December. In addition, some firms had used existing credit to distribute income that might otherwise have been released in 2018, for the purposes of prepayment.
“This is an acceptable use of these lines. These firms are not over-distributing; they are accelerating the release of undistributed income attributable to the earnings of the firm in 2017,” McKenney wrote.
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